Slowing Rates Of Return At Neoenergia (BVMF:NEOE3) Leave Little Room For Excitement

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at Neoenergia's (BVMF:NEOE3) ROCE trend, we were pretty happy with what we saw.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Neoenergia:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.10 = R$8.4b ÷ (R$102b - R$21b) (Based on the trailing twelve months to March 2024).

So, Neoenergia has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 12% generated by the Electric Utilities industry.

View our latest analysis for Neoenergia

In the above chart we have measured Neoenergia's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Neoenergia for free.

What The Trend Of ROCE Can Tell Us

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 109% more capital in the last five years, and the returns on that capital have remained stable at 10%. 10% is a pretty standard return, and it provides some comfort knowing that Neoenergia has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

In Conclusion...

In the end, Neoenergia has proven its ability to adequately reinvest capital at good rates of return. In light of this, the stock has only gained 29% over the last five years for shareholders who have owned the stock in this period. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Neoenergia (of which 1 can't be ignored!) that you should know about.

While Neoenergia may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com